Morning Report: Weak retail sales and inflation 5/12/17

Vital Statistics:

Last Change
S&P Futures 2386.0 -5.0
Eurostoxx Index 394.7 0.3
Oil (WTI) 47.9 0.1
US dollar index 90.2 -0.2
10 Year Govt Bond Yield 2.36%
Current Coupon Fannie Mae TBA 102.33
Current Coupon Ginnie Mae TBA 103.78
30 Year Fixed Rate Mortgage 4.08

Stocks are lower this morning as retailer earnings disappoint. Bonds and MBS are up on weak inflation data.

Inflation remains tame according to the Consumer Price Index which rose 0.2% MOM and is up 2.2% YOY. Stripping out food and energy, it is up 0.1% MOM and 1.9% YOY. This 1.9% YOY print in the core CPI is the lowest in almost 2 years.

Retail sales came in lower than expected at 0.4% for April. The control group, which strips out volatile elements like autos, gasoline and building products rose 0.2%. Note that retail sales only captures a part of consumer spending – services are largely ignored. Overall it points to steady consumer demand – nothing great. The mall based retailers have been getting crushed however as Q1 numbers were pretty much abysmal.

Wells Fargo is contemplating doing a private label MBS deal this year. Private label MBS are backed by mortgages without government insurance, and have been mainly limited to the jumbo market since the crisis.

Rising wages helped ease affordability concerns in the first quarter. A total of 60.3% of all homes were affordable to someone earning the median income of 68,000, up from 59.9% in the fourth quarter, according to NAHB / Wells Fargo Housing Opportunity Index.

Good news for the first time homebuyer: entry level salaries for college grads are the highest in a decade.

Morning Report: Starter homes are back 5/11/17

Vital Statistics:

Last Change
S&P Futures 2389.5 -5.8
Eurostoxx Index 394.6 -1.9
Oil (WTI) 48.0 0.6
US dollar index 90.6 0.1
10 Year Govt Bond Yield 2.41%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.53
30 Year Fixed Rate Mortgage 4.08

Stocks are lower this morning on lousy retailer earnings. Bonds and MBS are down small.

Initial Jobless Claims fell to 236,000 last week which is a 28 year low.

Inflation remains close to the Fed’s 2% target, according to the Producer Price Index. The headline number rose 0.5% MOM and is up 2.5% on a YOY basis, but when you strip out food and energy, it is up 1.9% YOY.

We had some hawkish statements from Boston Fed President Eric Rosengren yesterday, where he urged 3 more hikes this year as the economy is on an “unsustainable pace.” His rationale is the unemployment rate at 4.4%, which is below his estimate for full employment at 4.7%. Of course sub 1% GDP growth is probably “sustainable” ad infinitum, and there is no evidence of much in the way of wage growth. He also doesn’t think the tapering of MBS buying will affect mortgage rates too much, as long as it is gradual.

Inflation isn’t uniform, of course, and the index that measures it has to take this into account. Here is a chart of different goods and services and their inflation rates over the past 20 years:


The Canadians have a housing bubble on their hands, and the ratings agencies are getting worried. Canada is bedeviled with the same problem in the US of tight supply, although foreign demand is a big factor as well. Prices in Toronto rose 25% last year. Note that Canada’s economy is highly dependent on strong commodity prices, and indirectly, Chinese demand. If / when the Canadian real estate bubble bursts, it will probably affect property prices in the Pacific Northwest.

More evidence that builders are pivoting away from luxury building and towards more starter homes. In Q1, 854,000 new owner households were formed versus 365,000 new renter households. This is the first time new owners exceeded new renters in a decade. Fannie Mae’s share of mortgages to first time homebuyers has been steadily increasing. We are seeing an increase in the number of new homes smaller than 2200 square feet. Even McMansion giant Toll Brothers is going smaller.

FHFA Director Mel Watt is warning that the continuing sweep of Fannie Mae’s profits to Treasury is risking confidence in the entity. His proposal is to let Fannie Mae retain their earnings in order to re-build its capital cushion. This is to prevent the GSEs from needing another bailout later on. Note that the Obama administration used Fannie’s profits to paper over holes in Obamacare spending.

Morning Report: Comey fired 5/10/17

Vital Statistics:

Last Change
S&P Futures 2391.5 -1.8
Eurostoxx Index 395.9 0.1
Oil (WTI) 46.4 0.6
US dollar index 90.4  
10 Year Govt Bond Yield 2.36%
Current Coupon Fannie Mae TBA 102.6
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 4.05

Stocks are lower this morning on no real news. Bonds and MBS are up.

Last night, Donald Trump fired FBI Director James Comey. This will excite the chattering classes and provide endless fodder for the media, but it shouldn’t matter much to the markets. At the margin, it will probably push bond yields lower.

Mortgage applications rose 2.4% last week as purchases rose 2% and refis rose 3%. Conforming and jumbo rates were flat, while FHA ticked up a few basis points.

Import prices rose .5% MOM and are up 4.1% YOY. Bonds are shrugging off the data, however it could be a sign of inflation creeping up. We did see a small sell-off in the dollar during April, but nothing of that magnitude. Something to watch.

We will have some Fed-speak this afternoon with Eric Rosengren and Neel Kashkari speaking at 12:30 and 1:30 EST respectively.

With all the data over the past week, Fed Funds futures are moving mainly for the September meeting, which now has a 40% chance of a 25 basis point hike, up from 20% about a week ago. June is currently pegged at 80%. The weak Q1 print so far has not had an effect on trader sentiment.

Good advice for the first time homebuyer who is also saddled with student loan debt. Waiting until the deferral period has passed helps. Also look at FHA loans, however there are caveats.

Boston Fed President Eric Rosengren warns that GSE reform could hit the multi-family market. F&F bear the credit risk of 44% of the multi-fam market, more than all the banks combined.

Job openings in the construction sector are higher now than they were at the peak of the bubble. Yet the hiring rate is just off the lows of the bust. This certainly corroborates the claim that a labor shortage is a big reason why housing starts are still depressed. Lots of skilled labor left the sector after the bubble burst and got jobs in the energy patch. There is only one way to square that circle and that is to raise wages to attract talent. Which means compressing margins if builders are unable to pass on that cost increase. Regardless, it doesn’t bode well for new home affordability unless we begin to see wholesale increases in wages across the US, which hasn’t been happening.

Morning report: complacency reigns 5/9/17

Vital Statistics:

Last Change
S&P Futures 2397.5 2.5
Eurostoxx Index 396.1 2.0
Oil (WTI) 46.4 -0.1
US dollar index 90.5  
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.6
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 4.05

Markets are flattish on no real news. Bonds and MBS are flat as well.

Bond yields have been moving higher after the French election. Given that the result was not really a surprise there shouldn’t be too much in the way of follow through, but Euro bonds are selling off, which will translate into rising yields in the US on the relative value trade.

Job openings were flat in March at 5.74 million, which was slightly above estimates. The quits rate, which is a key indicator was up slightly YOY at 2.4% or about 3.1 million workers.

Small Business Optimism slipped in April, according to the NFIB Small Business Optimism Index. We are still at historically high readings, but the dimming prospect of tax reform in DC has hit the future expectations components of the index. The bright spot was hiring, as firms added .19 workers on average in April. 33% of respondents reported job openings they could not fill, which is the highest since 2000. Finding quality workers is a significant concern for many employers, although sales and regulatory issues are the biggest problems.

Radian’s Green River unit, which provides broker price opinions on residential real estate is the subject of a SEC probe. The feds are looking to see if BPOs were inflated on some bond deals where the interest was paid from the REO to rental trade. BPOs are cheaper than appraisals and are based on “drive by” evaluations. Many bond ratings agencies haircut BPO values in their assessments. If it turns out BPOs are inflated, it will probably have a dampening effect on bonds used to finance the activity. The plus side is that if private equity firms begin to unwind the trade, it will add some much needed supply to the market, especially at the lower price points.

Seriously delinquent loans and and foreclosure rates continue to fall, according to CoreLogic. The past due percentage dropped to 5%, the lowest level in 10 years. This is a decline from 5.5% a year ago. While rates have dropped nationally, they remain elevated in New York and New Jersey as well as some Mid-Atlantic states. We are seeing the biggest increases in the oil states.

Fannie and Freddie are looking at lending to borrowers with manufactured homes. FHFA needs to approve the program which is intended to increase credit to low-income borrowers, especially in rural areas.

The Fannie Mae Home Sentiment Index increased in April. Respondents are more constructive on real estate prices and the stability of their job situation, which was the catalyst to push the index up. The number of people who though now was a good time to buy increased by 5 percentage points. Respondents are also forecasting a 3% increase in home prices over the next 12 months.

5 things your appraiser wishes you knew. A big one is that the return on some home improvement projects are relatively low. A new kitchen will help, but you will be lucky to see a fraction of that expenditure translate into a higher home price. Pools are even worse. The biggest one? Finishing a basement. Most appraisers aren’t allowed to even count that square footage so that investment is valueless, at least as far as the appraisal is concerned.

Fear in the market is the lowest since 1993. The VIX index, which measures the price of options protection has been in the single digits lately. Does that portend anything? The old saw is “VIX is low, time to go. When VIX is high, time to buy.” VIX can stay low for extended periods, so the first part of that adage probably isn’t the greatest advice. Earnings growth has generally been good so far, which supports markets.

Want to really measure complacency in the market? Remember the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) which were the ne’er do wells of the European sovereign market? You can now lend money to the Greek government for the princely rate of 5.5%. They peaked at 27% or so. That said, German Bund continues to experience higher yields, and you can now get 44 basis points for tying up your money with Angela Merkel for the next 10 years. Gotta pay her 66 for two though.

The mortgage interest deduction is being targeted by the left, who claim it increases inequality. This debate will get interesting as it creates an unusual alliance between limited government flat tax types, and social justice types. IMO, the mortgage interest deduction is simply too popular to eliminate but we could see a cap on it, which would probably hit homes at the high end the most.

Morning Report: Globalism wins in France 5/8/17

Vital Statistics:

Last Change
S&P Futures 2395.0 -2.8
Eurostoxx Index 393.7 -0.9
Oil (WTI) 46.2 0.0
US dollar index 89.9  
10 Year Govt Bond Yield 2.37%
Current Coupon Fannie Mae TBA 102.6
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 4.05

Stocks are lower after Emmanuel Macron won the French election. Bonds and MBS are flat.

The election in France is perceived as a rejection of Trumpism (or whatever you want to call it). It was a return to the globalist left. Seems to be a little “buy the rumor, sell the fact” going on in the markets.

James Bullard is saying that the Fed Funds rate is close to where the Taylor Rule calculation would recommend they be set. The economy is in a low growth regime, but the labor force is in a high growth regime. As long as the labor market is still taking up slack, we won’t see much in the way of wage growth, which should keep the Fed from having to normalize too quickly. Depending on how you set some of the variables, the correct Fed Funds rate is anywhere from 67 basis points to 155 basis points.

The week after the jobs report is generally pretty data-light so we shouldn’t have that much in the way of market-moving data. The biggest chance of market-moving data is Friday when we get retail sales and the consumer price index. We do have Fed-speak every day except for Thursday.

Where are robots more likely to replace workers? It turns out that the upper Midwest is ground zero, however parts of the Northeast are as well. Out West, we see very little of it. This could partially explain why the real estate markets out West are red-hot, while markets in the Rust belt and the Northeast are tepid at best. Automation means jobs are being lost, which results in a declining population. For decades now, the general trend of population growth has been similar to what you would see if you picked up the United States by Maine, dangled it and shook it. Of course robots are a symptom of a bigger problem – some of these industries have high cost structures, and they will either automate or go out of business. Note that the West may not be immune – the next shoe to drop will be artificial intelligence and machine learning which will replace a lot of white collar workers as it develops.


Compare this to the CoreLogic real estate heat map:

corelogic MSAs

Definitely seems to be a correlation between overvalued (red) and undervalued (green) real estate markets and the presence of automation. It makes sense. If people are leaving the green areas, you would expect to have a harder time selling a home (or easier time buying) than in places that are experiencing an increase in population.

Buffetapalooza or Capitalist Woodstock (the Berkshire Hathaway shareholders’ meeting) was over the weekend in Omaha, where you can sing with the Fruit of the Loom guys, eat at Warren’s favorite steak house, eat Sees candy, etc. He did have a few words about Wells’s scandal (BRK is WFC’s biggest shareholder).

Morning Report: Strong Jobs Report 5/5/17

Vital Statistics:

Last Change
S&P Futures 2389.0 3.5
Eurostoxx Index 391.7 -0.3
Oil (WTI) 45.1 -0.4
US dollar index 89.9
10 Year Govt Bond Yield 2.34%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.625
30 Year Fixed Rate Mortgage 4.02

Stocks are up after the strong jobs report. Bonds and MBS are up as well.

Jobs report data dump:

  • Nonfarm payrolls + 211,000
  • Unemployment rate 4.4%
  • Labor force participation rate 62.9%
  • Average hourly earnings up 0.3% MOM / 2.5% YOY

Overall a strong jobs report. The unemployment rate is the lowest in a decade, reaching close to the cyclical low right before the real estate bubble blew up. Despite the low numbers we have yet to see much in the way of wage growth. The employment-to-population ratio, which is the Fed’s preferred employment indicator, rose to 60.1%.  The U-6 unemployment indicator (which is more broad and includes the long-term unemployed) fell sharply during the month from 8.9% last month to 8.6%. U-6 is down 1.1% YOY. U-6 measures how much slack there is in the labor market, and as that slack is taken up wage inflation should return. This report shouldn’t really move the needle for the June FOMC meeting and the Fed.

Yesterday, the House passed narrowly its Obamacare replacement bill, and it will now head to the Senate where it will be ignored and slow-walked. The House bill was never scored by the CBO, and pushed through on short notice, which pretty much tips the GOP’s hand that this was never intended to actually become law and has a 0% chance of surviving intact. FWIW, the bill is really the Republican Primary Prevention Act of 2017, which is to say merely a political gambit. The Senate may also be waiting to see what insurance rates look like for 2018 and also how many drop out of the exchanges. The only way to get Democrats and moderate Republicans on board is if they see the Obamacare exchanges failing.

Now that Obamacare is out of the way in the House, their attention will turn to tax reform. Individual tax reform will get zero support from Democrats, however there might be some common ground on corporate taxes.

Fannie Mae reported income of $2.8 billion for the first quarter, all of which will go to the government sometime in June. Total equity has fallen from $6.1 billion at the end of last year to $3.4 billion at the end of Q1. This is the problem the government has to address with the current regime: sending all profit to Treasury is eroding Fannie’s capital. This is one motivation to get the government serious about GSE reform, although it isn’t a high priority in Washington at the moment.

Inflation continues to be tame, and part of that is being driven by oil, which has fallen 15% over the past few weeks. The rally in oil that began with OPEC’s plan to cut production has been completely given back. While the Fed will undoubtedly characterize oil as a transitory phenomenon it does flow through to other products and can help drive inflation.

Morning Report: Fed still constructive on the economy 5/4/17

Vital Statistics:

Last Change
S&P Futures 2389.5 6.3
Eurostoxx Index 391.1 1.7
Oil (WTI) 46.9 -0.9
US dollar index 90.1
10 Year Govt Bond Yield 2.34%
Current Coupon Fannie Mae TBA 102.84
Current Coupon Ginnie Mae TBA 103.92
30 Year Fixed Rate Mortgage 4.04

Stocks are higher as the GOP votes on the Obamacare replacement. Bonds and MBS are down.

The Fed made no changes to policy yesterday. Bonds sold off a few ticks on the announcement, which was constructive on the economy. Specifically, they noted that job gains remained solid, despite a slowdown in economic growth. Consumption remains an issue, but much of that is due to an increase in the savings rate post-crisis.

Job cuts decreased in April, according to outplacement firm Challenger, Gray and Christmas. Just over 36,000 job cuts were announced in April, which is down 15% from March and 43% from April last year. Retailers announced the most cuts, with autos and healthcare coming in second and third.

Initial Jobless Claims fell to 238k last week, which is still at the lowest levels since the early 1970s.

Productivity fell 0.6% in the first quarter while unit labor costs rose 3%. This reading certainly makes sense in light of the weak Q1 GDP print. The conundrum of the past decade has been the drop in productivity growth, which drives wage growth and increases in standards of living. While there is a definite measurement issue (for example the plethora of free information available on the internet would certainly seem to boost productivity, however because it is free, it doesn’t show up in the calculations). Last year’s productivity growth was 1.4%, which was well below the historical average of 2.2%. Theoretically, low productivity would lower the growth ceiling on the economy which would make inflation emerge quicker and force the Fed to act more aggressively, however inflation is nowhere to be found and while there are labor shortages we aren’t seeing any real wage inflation yet.

Donald Trump has mentioned breaking up the big banks and a return to some sort of Glass-Steagall regime. That said, it doesn’t appear to be a priority, and the administration barely discusses it. Any discussion of breaking up the big banks would probably be limited to Bank of America, JP Morgan, and Citi. Any sort of break-up of these 3 would probably have limited impact on the mortgage market, as non-banks now dominate the space and Wells Fargo really doesn’t have the investment banking footprint the big 3 have.

The continuing resolution was passed by the House which should take the risk of a government shut down off the table until later next year.

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